Transportation & Logistics_2025 Outlook_ Been Down So Long, It’s Beginning to Look Like Up

Industry Overview * Freight Market Recovery: The freight market is expected to recover slowly in 2025, with truckload contract rates increasing by 1-3% YoY. The recovery will be gradual due to the presence of "shadow capacity" across various transportation modes and the significant surge in containerized imports in the second half of 2024. * Inflation and Cost Inflation: Inflation is expected to decelerate in 2025, which should help ease cost inflation. Maintenance and equipment inflation should settle down as contracts are pegged to CPI, while headcount is still elevated for U.S. rails. * Policy Uncertainty: The potential for tariffs and other policies could boost inflation and dampen the positive sentiment for a freight recovery. The impact from potential tariffs and other policies could boost inflation and dampen the positive sentiment for a freight recovery. * Valuations: Valuations in the transportation and logistics sector are expected to remain range-bound in the near term, with potential upside from a new cycle in the spot market and lower tax and interest rates. Key Sector Themes and Sub-Sector Views * Truckload Carriers and Brokers: The truckload market is at the bottom of a long and grueling rate cycle. A gradual recovery is expected in 2025, with truckload contract rates increasing by 1-3% YoY. Top picks include CHRW and CP. * LTL & Logistics: The LTL sector is expected to see a positive re-rating as the subsector has become the most favored in transports. Top picks include XPO and JBHT. * Intermodal: The intermodal sector is expected to continue to benefit from railroads pivoting to growth and should start to get a few tailwinds from the truckload market. Top pick is JBHT. * Parcels: The parcel carriers are starting to look more interesting after a long-awaited pivot to price discipline and a focus on becoming Better and Smaller. Top picks include FDX and UPS. Company-Specific Views * C.H. Robinson (CHRW): CHRW has restructured operations, leveraged technology, and improved discipline without diluting the value of its scale and knowledge. The company is on the path to decouple headcount from volume growth, boosting operating leverage. * Canadian Pacific Kansas City (CPKC): CPKC provides unique growth opportunities for shippers that are less sensitive to the freight cycle. The company has de-rated since the election and the spread versus NSC compressed by 2.5x or 42%. * FedEx Corporation (FDX): FDX could potentially be affected by global tariffs under the new administration but the parcel carriers are starting to look more interesting after a long-awaited pivot to price discipline and a focus on becoming Better and Smaller. * United Parcel Service (UPS): UPS could potentially be affected by global tariffs under the new administration but the parcel carriers are starting to look more interesting after a long-awaited pivot to price discipline and a focus on becoming Better and Smaller. Conclusion The transportation and logistics sector is expected to see a gradual recovery in 2025, driven by a slow freight market recovery and lower inflation. Valuations in the sector are expected to remain range-bound in the near term, with potential upside from a new cycle in the spot market and lower tax and interest rates.